12

- i CHAPTER 12

. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

................................ ................................ ................................ ......... 12

- 1

12.2 METHODOLOGY

................................ ................................ ................................ ........ 12

- 1

12.2.1 Phase I: Industry Profile

................................ ................................ ................................ . 12

- 2

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview G uide

................................ ........ 12

- 2

12.2.2.1 Industry Cash

- Flow Analysis

................................ ................................ ....... 12

- 2

12.2.2.2 Interview Guides

................................ ................................ .......................... 12

- 3

12.2.3 Phase III: Subgroup Analysis

................................ ................................ ......................... 12

- 3

12.2.3.1 Manufacturing Interviews

................................ ................................ ............ 12

- 3

12.2.3.2 Revised Industry Cash

- Flow Analysis

................................ ......................... 12

- 4

12.2.3.3 Manufacturer Subgroup Analysi s

................................ ................................ 12

- 4

12.2.3.4 Small

- Business Manufacturer

................................ ................................ ...... 12

- 4

12.2.3.5 Manufacturing Capacity Impact

................................ ................................ .. 12

- 5

12.2.3.6 Employment Impact

................................ ................................ ..................... 12

- 5

12.2.3.7 Cumulative Regulatory Burden

................................ ................................ ... 12

- 6

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

................................ .......... 12

- 6

12.3.1 Potentially Large Conversion Costs

................................ ................................ ............... 12

- 6

12.3.2 Product Classes

................................ ................................ ................................ .............. 12

- 7

12.3.3 Wash Performance

................................ ................................ ................................ ......... 12

- 7

12.3.4 Tub Capacity Measurement

................................ ................................ ........................... 12

- 8

12.3.5 ENERGY STAR

................................ ................................ ................................ ............ 12

- 8

12.4 GRIM INPUTS AND ASSU MPTIONS

................................ ................................ ........ 12

- 8

12.4.1 Overview of the GRIM

................................ ................................ ................................ .. 12

- 8

12.4.2 Sources for GRIM Inputs

................................ ................................ ............................... 12

- 9

12.4.2.1 Corporate Annual Reports

................................ ................................ ........... 12

- 9

12.4.2.2 Standard and Poor Credit Ratings

................................ .............................. 12

- 10

12.4.2.3 Shipments Model

................................ ................................ ....................... 12

- 10

12.4.2.4 Engineering Analysis

................................ ................................ ................. 12

- 10

12.4.2.5 Manufacturer Interviews

................................ ................................ ............ 12

- 10

12.4.3 Financial Parameters

................................ ................................ ................................ .... 12

- 11

12.4.4 Corporate Discount Rate

................................ ................................ .............................. 12

- 11

12.4.5 Trial Standard Levels

................................ ................................ ................................ ... 12

- 13

12.4.6 NIA Shipments Forecast

................................ ................................ .............................. 12

- 15

12.4.6.1 Base

- Case Shipments Forecast

................................ ................................ .. 12

- 15

12.4.6.2 Standards

- Case Shipments Forecast

................................ .......................... 12

- 16

12.4.7 Production Costs

................................ ................................ ................................ .......... 12

- 16

12.4.8 Conversion Costs

................................ ................................ ................................ ......... 12

- 18

12.4.8.1 Residential Clothes Washer Product and Capital Conversion Costs

......... 12

- 18

12.4.9 Markup Scenarios

................................ ................................ ................................ ........ 12

- 23

12 .4.9.1 No Commoditization Scenario

................................ ................................ ... 12

- 2412

- ii

12.4.9.2 Tiered Markup Scenario

................................ ................................ ............ 12

- 24

12.4.9.3 Tiered Markups with Margin Pressure Markup Scenario

.......................... 12

- 26

12.5 INDUSTRY FINANCIAL I MPACTS

................................ ................................ ........ 12

- 28

12.5.1 Introduction

................................ ................................ ................................ .................. 12

- 28

12.5.2 Residential Clothes Washer Industry Financial Impacts

................................ ............. 12

- 30

12.6 IMPACTS ON SMALL RES IDENTIAL CLOTHES WAS HER

MANUFACTURERS

................................ ................................ ................................ .. 12

- 33

12.7 OTHER IMPACTS

................................ ................................ ................................ ...... 12

- 34

12.7.1 Employment

................................ ................................ ................................ ................. 12

- 34

12.7.2 Production Capacity

................................ ................................ ................................ ..... 12

- 37

12.7.3 Cumulative Regulatory Burden

................................ ................................ ................... 12

- 38

12.7.3.1 DOE Regulations for Other Products Produced by Residential Clothes

Washer Man ufacturers

................................ ................................ ............... 12

- 39

12.7.3.2 Other Federal Regulations

................................ ................................ ......... 1 2

- 43

12.7.3.3 UL Conversion Costs

................................ ................................ ................. 12

- 43

12.7.3.4 Other Regulations That Could Impact Residential Clothes Washer

Manufacturers

................................ ................................ ............................ 12

- 44

12.8 CONCLUSION

................................ ................................ ................................ ............ 12

- 44

12.8.1 Residential Clothes Washers

................................ ................................ ........................ 12

- 45

LIST OF TABLES

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by

This Rulemaking

................................ ................................ ................................ 12

- 5

Table 12.4.1 GRIM Financial Parameters Based on 1999

– 2006 Weighted Company

Financial Data

................................ ................................ ................................ .. 12

- 11 Table 12.4.2 Cost of Equity Calculation

................................ ................................ .................. 12

- 12

Table 12.4.3 Cost of Debt Calculation

................................ ................................ ..................... 12

- 13 Table 12.4.4 Trial Standard Levels for Residential Clothes Washers (Using Appendix J1)

... 12

- 14 Table 12.4.5 Trial Standard Levels for Residential Clothes Washers (Using Appendix J2)

... 12

- 15 Table 12.4.6 Total NIA Shipments Forecast in 2015 in the Reference NIA Shipment

Scenario (Residential Clothes Washers)

................................ ......................... 12

- 15

Table 12.4.7 Base

- Case Distributions of Efficiencies for Residential Clothes Washers in

2015

................................ ................................ ................................ .................. 12

- 16

Table 12.4.8 MPC Breakdown for Standard

- Size Top

- Loading Clothes Washers

................. 12

- 17

Table 12.4.9 MPC Breakdown for Standard

- Size Front

- Loading Clothes Washers

............... 12

- 18

Table 12.4.10 MPC Breakdown for Compact

- Size Top

- Loading Clothes Washers

............... 12

- 18 Table 12.4.11 MPC Breakdown for Compact

- Size Front

- Loading Clothes Washers

............. 12

- 18 Table 12.4.12 Product and Capital Conversion Costs for Standard

- Size Top

- Loading

Clothes Washers by TSL

................................ ................................ ................. 12

- 20 Table 12.4.13 Product and Capital Conversion Costs for Standard

- Size Front

- Loading

Clothes Washers by TSL

................................ ................................ ................. 12

- 2112

- iii

Table 12.4.14 Product and Capital Conversion Costs for Compact

- Size Top

- Loading

Clothes Washers by TSL

................................ ................................ ................. 12

- 22 Table 12.4.15 Product and Capital Conversion Costs for Compact

- Size Front

- Loading

Clothes Washers by TSL

................................ ................................ ................. 12

- 23 Table 12.4.16 Tiered Markups for Standard

- Size Top

- Loading Clothes Washers

.................. 12

- 25 Table 12.4.17 Tiered Markups for Standard

- Size Front

- Loading Clothes Washers

............... 12

- 25 Table 12.4.18 Tiered Markups for Compact

- Size Top

- Loading Clothes Washers

................. 12

- 26 Table 12.4.19 Tiered Markups for Compact

- Size Front

- Loading Clothes Washers

............... 12

- 26 Table 12.4.20 Tiered Markups with Margin Pressure Markup for Standard

- Size Top

Loading Clothes Washers

................................ ................................ ................ 12

- 27 Table 12.4.21 Tiered Markups with Margin Pressure Markup for Standard

- Size Front

Loading Clothes Washers

................................ ................................ ................ 12

- 27 Table 12.4.22 Tiered Markups with Margin Pressure Markup for Compact

- Size Top

Loading Clothes Washers

................................ ................................ ................ 12

- 28 Table 12.4.23 Tiered Markups with Margin Pressure Markup for Compact

- Size Front

Loading Clothes Washers

................................ ................................ ................ 12

- 28 Table 12.5.1 Manufacturer Impact Analysis for Residential Clothes Washers

– No

Commoditization Markup Scenario

................................ ................................ . 12

- 30 Table 12.5.2 Manufacturer Impact Analysis for Residential Clothes Washers

– Tiered

Markup Scenario

................................ ................................ .............................. 12

- 30 Table 12.5.3 Manufacturer Impact Analysis for Residential Clothes Washers

– Tiered

Markup Scenario with Margin Impacts

................................ ........................... 12

- 30 Table 12.7.1 Potential Changes in the Total Number of Domestic Residential Clothes

Washer Production Workers in 2015

................................ ............................... 12

- 36 Table 12.7.2 Other DOE and Federal Actions Affecting the Residential Clothes Washer

Industry

................................ ................................ ................................ ............ 12

- 40 Table 12.7.3 DOE Regulations on Products For Which Residential Clothes Washer

Manufacturers Hold Significant Market Share

................................ ................ 12

- 42

Table 12.7.4 Other Covered Products For Which Residential Clothes Washer

Manufacturer Market Share Data Is Unavailable.

................................ ........... 12

- 43

LIST OF FIGURES

Figure 12.4.1 Using the GRIM to Calculate Cash Flow

................................ ............................ 12

- 9 Figure 12.5.1 Annual Industry Net Cash Flows for Residential Clothes Washers (No

Commoditization Markup Scenario)

................................ ................................ 12

- 31 Figure 12.5.2 Annual Industry Net Cash Flows for Residential Clothes Washers (Tiered

Markup Scenario)

................................ ................................ ............................. 12

- 32 Figure 12.5.3 Annual Industry Net Cash Flows for Residential Clothes Washers (Tiered

Markup Scenario with Margin Impacts)

................................ .......................... 12

- 33 Figure 12.7.1 Total Residential Clothes Washer Industry Domestic Employment by Year

... 12

- 3712-1 CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S. Department of Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6295(o)(2)(B)(i) ) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id . DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of more stringent energy conservation standards on manufacturers

of residential clothes washers , and assessed the impact of such standards on direct employm ent and manufacturing capacity.

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an industry cash

- flow model adapted for each product in this rulemaking. The GRIM inputs include information on industry cost structure, shipments, and pricing strategies. The GRIM’s k ey output is the industry net present value (INPV). The model estimates the financial impact of more stringent energy conservation standards by comparing changes in INPV between a base case and the various trial standard levels (TSLs) in the standards case . The qualitative part of the MIA addresses product characteristics, manufacturer characteristics , market and product trends, as well as the impact of standards on subgroups of manufacturers.

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “In dustry Profile,” consisted of preliminary research directed at characteriz ing the residential clothes washer industry. This

research in volved collecting data on market share, sales volumes and trends, pricing, employment, and the industry financial structu r e.

In Phase II, “Industry Cash Flow,” DOE created a GRIM for residential clothes washers

to model the economic impact of amended energy conservation standards to the residential clothes washer industry as a whole. The DOE also developed manufacturer i nt erview guides to gather additional information on the pote ntial impacts on manufacturers in Phase III.

In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers representing

over 85 percent of residential clothes washers . Interviewees included manufacturers with various market shares and product focus , providing a representative cross

- section of the industries. During interviews, DOE discussed financial topics specific to each manufacturer and obtained

each manufacturer’s view of the industry. The interviews provided DOE with valuable12-2

information for evaluating the impacts of amended energy conservation standards on manufacturer cash flows, investment s , and employment.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the residential clothes washer industry

that built upon the market and technology assessment prepared for this rulemaking. (See chapter 3 of this Technical Support Document (TSD) )

. Before initiating the deta iled impact studies, DOE collected information on the present and past market structure and characteristics of the industry tracking trends in market share, product attributes, product shipments, manufacturer markups,

and the cost structure for various man ufacturers.

The profile also included a top

- down analysis of manufacturers in the industry using Security and Exchange Commission 10

– K filings

, a Standard & Poor’s stock reports, b and corporate annual reports released by both public and privately held com panies

. DOE used this and other publicly available information to derive preliminary financial inputs for the GRIM ( e. g. revenues
, cost of goods sold; depreciation ; selling, general and administrative expenses ( SG&A ); and research and development (R&D) exp enses)

.

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

Phase II focused on the financial impacts of amended energy conservation standards on

the residential clothes washer industry as a whole

. Amended energy conservation standards can

affect manufacturer cash flow s in three distinct ways: (1) by c reat ing a need for increased investment, (2) by rais ing production costs per unit, and (3) by alter ing revenue due to higher

per

- unit prices and /or possible c hanges in sales volumes. DOE used the GRIM to model these

effects in a cash

- flow analysis for the residential clothes washer industry. In performing this analysis, DOE used the financial values derived during Phase 1 and the shipment assumptions

from the N IA. In addition to the cash

- flow analysis , DOE also prepared written guides for

manufacturer interviews as part of Phase II

.

12.2.2.1 Industry Cash

- Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows from the announcement year of amended energy conservation standards until several years after the

standards’ compliance date. These factors include annual expected revenues, costs of sales, SG&A, taxes, and capital expenditures related to the amended standards. Inputs to the GRIM

incl ude manufacturing costs , markups, and shipment forecasts developed in other analyses. DOE derived the manufacturing costs from the engineering analysis

, information provided by the industry

, public ly available financial reports

, and interviews with manufac turers. DOE developed

a A vailable online at www.sec.gov

.

b A vailable online at www2.standardandpoors.com

.12-3

alternative markup scenarios for each GRIM based on discussions with manufacturers. DOE’s shipments analysis, presented in chapter 10 of this TSD, provided the basis for the shipment projections in each GRIM. The financial parameters were developed using publicly available manufacturer data and were revised with information submitted confidentially during

manufacturer interviews. DOE used the GRIM to compare in industry net present value ( INPV )

in the base case with INPV at various TSL s (the standards cases). The difference in INPV between the base and standards cases represents the financial impact of the amended standard on

manufacturers.

12.2.2.2 Interview Guides

During Phase III of the MIA, DOE interviewed manufacturers to gather informatio n on the effects of amended energy conservation on revenues and finances, direct employment, capital assets, and industry competitiveness. Before th e interviews, DOE distributed interview guide s for

residential clothes washers . The interview guides provide d a starting point to help identify

relevant issues and understand the impacts of amended energy conservation standards on individual manufacturers or subgroups of manufacturers. Most of the information DOE received from these meetings is protected by non

- disclosure agreements and resides with DOE’s contractors. Before each telephone interview or site visit, DOE provided company representatives with an interview guide that included the topics for which DOE sought input. The MIA interview topics included (1) key issues to this rulemaking; ( 2 ) engineering and life cycle

cost follow

- up ; ( 3 ) manufacturer markups and profitability; ( 4 ) financial parameters ; and ( 5 )

conversion costs

. The interview guides are presented in a ppendix 12

- A

.

12.2.3 Phase III: Subgroup Analysis

While conducting the MIA, DOE interviewed a representative cross

- section of residential

clothes washer manufacturers. T he MIA interviews broadened the discussion to include

business

- related topics. DOE sought to obtain feedback from industry on the appro aches used in the GRIM and to isolate key issues and concerns. During interviews, DOE did not identify any manufacturer subgroup s that would warrant a subgroup analysis.

12.2.3.1 Manufacturing Interviews

The information gathered in Phase I and the cash

- flow analys is performed in Phase II are supplemented with information gathered from manufacturer interviews in Phase III. The interview process provides an opportunity for interested parties to express their views on important issues privately, allowing confidential or sensitive information to be considered in the rulemaking process.

DOE used these interviews to tailor each GRIM to reflect unique financial characteristics of each product group. Within each manufacturer group, DOE contacted companies from its

databas e of manufacturers. C ompanies with various market shares and product focus were12-4

interviewed to provide a representation of the industry. Interviews were scheduled well in advance to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE sought interactive interviews, which help clarify responses and identify additional issues. The resulting information provides valuable inputs to the GRIM

.

12.2.3.2 Revised Industry Cash

- Flow Ana lysis

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input financial figures for review and evaluation. During the interviews, DOE requested comments on the values it selected for the parameters. DOE revised its industry cash

- flo w models based on

this feedback. Section 12.4.3 provides more information on how DOE calculated the parameters.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to develop an industry cash flow estimate may not adequately assess differential impacts of amended energy conservation standards on manufacturer subgroups. For example, small businesses

, manufacturers of niche p roduct s, or companie s exhibiting a cost structure that differs significantly from the industry average cou ld be more negatively affected. DOE uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interviews, DOE discussed the potential subgroups and subgroup members it identified for the analysis. DOE asked

manufacturers and other interested parties to suggest what subgroups or characteristics are the most appropriate to analyze. As discussed below, since DOE only identified one small business manufacturer, DOE did not conduct a separate subgroup analysis of small business

manufact urers.

12.2.3.4 Small

- Business Manufacturer

DOE used the Small Business Administration (SBA) small business size standards published on August 22, 2008, as amended, and the North American Industry Classification System (NAICS) code, presented in Table 12.2

. 1 to determine whether any small entities would be affected by the rulemaking. c For the product classes under review, the SBA bases its small

business definition on the tota l number of employees for a business, its subsidiaries, and its parent companies. An aggregated business entity with fewer employees than the listed limit is

considered a small business.

c The size standards are available on the SBA’s website at www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf

.12-5

Table 12.2

. 1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking
Industry Description Revenue Limit Employee Limit NAICS Household Laundry Equipment Manufacturing N/A 1000 335224

DOE used the Association of Home Appliance Manufacturers (AHAM) 1 member directory as well as public certification databases includ ing the Consortium of Energy Efficiency (CEE), 2 California Energy Commission (CEC), 3 and ENERGY STAR 4 to identify manufacturers

of residenti al clothes washers

. DOE then checked this list of clothes washer manufacturers against the employee limit for small businesses using reports from vendors such as D un &

B radstreet. DOE also consulted publicly available data from the Small Business Associati on (SBA) to determine the presence of any additional small business es in the industry

. Further,

DOE asked interested parties and industry representatives if they were aware of other small

business manufacturers and checked any companies identified against the small business criteria.

During its research, DOE identified one small business that manufactures products covered by this rulemaking and meets the criteria as specified by the SBA. DOE conducted an analysis of potential impacts of increased energy ef ficiency standards on this manufacturer. Section 12.6 provides the details of this analysis.

12.2.3.5 Manufacturing Capacity Impact

One significant outcome of amended energy conservation standards could be the obsolescence of existing manufacturing assets, including tooling and production equipment . The manufacturer interview guides have a series of questions to help identify impacts o f amended standards on manufacturing capacity, specifically capacity utilization and plant location decisions in the United States and North America, with and without amended standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of any stranded assets; and estimates for any one

- time changes to existing plant, property, and equipment (PPE). DOE’s estimates of the one

- time capital changes and stranded assets affect the cash flow estimates in the GRIMs. These estimates

can be found in section 12.4.8 ; DOE’s discussion of the capacity impact can be found in section

12.7.2

.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic direct employment pattern s might be affected, the interviews explored current employment trends in the residential clothes washer industry . The interviews also solicited manufacturer views on changes in employment patterns that may result from more stringent standards. The employm ent impacts section of the interview guide focused on current employment levels associated with manufacturers at each production facility, expected future employment levels with and without amended energy12-6

conservation standards, and differences in workforc e skills and issues related to the retraining of employees. The employment impacts are reported in section 12.7.1

.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitig ate the overlapping effects on manufacturers due to amended energy conservation standards and other regulatory actions affecting the same products. DOE analyzed the impact on manufacturers of multiple, product

- specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified regulations relevant to residential

clothes washer manufacturers, such as State regulations and other Federal regulations that impact other products made by the same manufacturers. Discussion of t he cumulative regulatory burden

can be found in section 12.7.3

.

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUE S

Each MIA interview starts by asking: “What are the key issu es for your company regarding the energy conservation standard rulemaking?” This question prompts manufacturers to identify the issues they feel DOE should explore and discuss further during the interview. The following section describes key issues manufac turers mentioned for all product classes under

review.

12.3.1 Potentially Large Conversion Costs

Manufacturers indicated that they were greatly concerned about the potential for this rulemaking to require significant product and capital conversion costs. Introdu cing new residential clothes washer platforms involve s very large upfront costs. These capital and product development costs can be justified because a basic platform typically undergoes incremental changes over a number design cycles and the initial inves tment can be at least partially spread over all these shipments. Many of the existing residential clothes washer platforms have some designs options available that would only necessitate these incremental types of changes. However, substantially higher eff iciencies could potentially necessitate a drum or cabinet capacity change. In this case, rather than altering the current platform, the required changes are more in line with designing a completely new platform . A new platform would require replacing

most production equipment at a very large capital cost. Manufacturers also indicated that these initial costs for a new basic platform could result in a substantial shift in employment. Some manufacturers were also concerned that devoting resources to efficienc y improvements could hurt their products in the market because these efforts could come at the expense of other

features

.12-7

12.3.2 Product Classes

Manufacturers were divided on the need to retain top

- loading and front

- loading standard

size product classes. In gene ral, manufacturers that produce top

- loading clothes washers favored retaining the two distinct product classes. Manufacturers that produce only front

- loading clothes washers were less concerned with maintaining the method of access as a product class

disti nction.

While all manufacturers agreed front

- loading clothes washers are an important product offering, many manufacturers also stated that top

- loading clothes washers are an important option for consumers because they offer the following benefits:

 Shor ter cycle times

 Lower price points

 L ower installation costs because they do not require a pedestal

 Easier loading

 Easier access to add garments mid

- cycle

 Less floor vibration

Some manufacturers in favor of maintaining the separate product classes also stated that eliminating top

- loading clothes washers would harm lower

- income customers who typically purchase baseline clothes washers. In addition, b ecause front

- loading clothes w ashers are mature in the marketplace, consumers are aware of the benefits of top

- loading clothes washers, high efficiency top

- loading products, and front

- loading clothes washers and have the ability to choose higher efficiency products in either configurat ion.

12.3.3 Wash Performance

Manufacturers were concerned that efficiency gains over time have limited the potential to improve efficiency without possibly decreasing wash performance and negatively impacting consumer utility . Many manufacturers were concerned that a test procedure that did not take a minimum wash performance into consideration, coupled with a more stringent energy conservation standard, could force manufacturers to limit water consumption to a level that

w ould harm consumers. For example, over

- sudsing could be more commonplace. Also, water levels could be reduced to the point where cold water would no longer sufficiently clean clothes. Either one of these issues would result in lost energy savings as consumers either rewashed clothes or no longe r selected cold water wash cycles. Consequently, many manufacturers supported adding a performance metric to the test procedure to ensure that consumers would genuinely benefit from improved efficiency.12-8

12.3.4 Tub Capacity Measurement

Many manufacturers mentione d that different companies use inconsistent approaches in measuring tub capacity. While manufacturers offered slightly different suggestions for how to measure capacity, most were supportive of eliminating the ambiguity. Manufacturers hoped this

issue woul d be resolved before the implementation of these amended energy conservation

standards because both the modified energy factor and water factor calculations depend on measured capacity.

12.3.5 ENERGY STAR

One manufacturer mentioned an unwillingness to design new residential clothes washers that just meet the baseline compliance level. This manufacturer exclusively produces clothes washers that meet ENERGY STAR specifications. Because of their overall energy strategy, they

must take into consideration ENERGY STAR levels when designing new clothes washers in order to remain competitive in that market segment. This manufacturer mentioned that the costs associated with designing new products to meet ENERGY STAR levels were not reflected in

DOE’s incremental cost table s.

Another manufacturer mentioned that ENERGY STAR compliance is an important purchasing factor, especially in the front

- loading clothes washer market. The manufacturer expressed concern that standards that are too aggressive could jeopardize the future of the ENERGY STAR program for residential clothes washers. In turn, that could impact local rebates that enable manufacturers to offer products that meet the minimum efficiency standards.

12.4 GRIM INPUTS AND ASSU MPTIONS

The GRIM serves as the main tool for a ssessing the impacts on industry due to amended energy conservation standards. DOE relies on several sources to obtain inputs for the GRIM. Data and assumptions from these sources are then fed into an accounting model that calculates the industry cash flow both with and without amended energy conservation standards.

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4

. 1 , is an annual cash fl ow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of regulatory conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet uses a n umber of inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 2011 , and continuing

to 2044 . The model calculates the INPV by summing the stream of annual discounted cash flows during this period. 512-9 Figure 12.4

. 1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares changes in INPV between the base

- case and the standard

- case scenario induced by am ended energy conservation standards. The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy conservation standard on

manufacturers. Appendix 12

- A provides more technical details and user information for the

GRIM.

12.4.2 Sources for GRIM Inputs

The GRIM uses several different sources for data inputs in determining industry cash flow. These sources include corporate annual reports, company profiles, U.S. Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer interviews

.

12.4.2.1 Corporate Annual Reports

Corporate annual reports for publicly held companies are freely available to the general public through the SEC as filings of form 10

- K. Additionally, som e privately held companies publish annual financial reports which are regularly available on their corporate websites. DOE developed initial financial inputs to the GRIM by examining the publicly available annual reports of companies primarily engaged in t he manufacture of home appliances and whose combined product range includes residential clothes washers . Because these companies produce a range of different products, DOE initially assumed that the industry average figures calculated for these companies w ere representative of manufacturing for residential clothes washers . Since these companies do not provide detailed information about their individual product lines, DOE used the financial information for the entire companies in developing its initial estim ates of the financial parameters in both GRIM analyses. These figures were later revised using feedback from interviews to be representative of manufacturing for each product . DOE used corporate annual reports to derive the following initial inputs to the GRIM:

 Tax rate12-10

 Working capital

 SG&A

 R&D

 Depreciation

 Capital expenditures

 Net PPE

12.4.2.2 Standard and Poor Credit Ratings

S tandard and P oor (S&P) provides independent credit ratings, research, and financial

information. DOE relied on S& P reports to determine the industry’s average cost of debt when calculating the weighted average cost of capital.

12.4.2.3 Shipments Model

The GRIM used shipment projections derived from DOE’s shipments model in the national impact analysis (NIA). The model relied on historical shipments data for residential

clothes washers . Chapter 10 of the TSD describes the methodology and analytical model DOE used to forecast shipments.

12.4.2.4 Engineering Analysis

DOE conducted the engineering ana lyses for this rulemaking using the efficiency

- level approach, combined with the cost

- assessment approach, to develop a cost for each efficiency

level for residential clothes washers. During th is analysis, DOE used a manufacturing cost model to develop manufacturer production cost (MPC) estimates for residential clothes washers . The analysis yielded the labor, materials, overhead, and total production costs for products at each efficiency level. The engineering analysis also estimated a manufacturer markup to determine the

manufacturer s elling price (MSP) for each product at every efficiency level

. Chapter 5 of this TSD describes the engineering analysis in detail.

12.4.2.5 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative cross

section of manufa cturers. DOE also interviewed manufacturers representing a significant portion of sales in every product class . During these discussions, DOE obtained information to determine and verify GRIM input assumptions in each industry. Key topics discussed during the interviews

and reflected in the GRIM include:

 C apital conversion costs (one

- time investments in PPE);

 P roduct conversion costs (one

- time investments in research, product development, testing, and marketing);12-11

 P roduct cost structure, or the portion of t he MPCs related to materials, labor, overhead, and depreciation costs;

 P rojected total shipment and shipment distribution mix; and

 MPCs estimated in the engineering analysis.

12.4.3 Financial Parameters

In the manufacturer interviews, DOE used the financial para meters from 2004 to 2009 for appliance manufacturers as a starting point for determining the residential clothes washer industry financial parameters. These initial estimates were used because many of the same white goods manufacturers produce a number of different product lines (including clothes washers, cooking products, clothes dryers, and room air conditioners) and no other publicly available SEC

10

- K reports for residential clothes washer manufacturers were available. These financial parameters were d etermined by averaging the values in the annual reports of three publicly traded companies engaged in manufacturing and selling clothes washers over an 8

- year period spanning from 1999 through 2006. Table 12.4

. 1 below shows the data used to determine the initial financial parameter estimates.

Table 12.4

. 1 GRIM Financial Parameters Based on 1999

– 2006 Weighted Company

Financ ial Data

Parameter Industry

Weighted Average Manufacturer

A B C D

Tax Rate (% of Taxable Income) 34.3 33.5 47.3 22.5 33.3 Working Capital (% of Revenue) 6.5 12.1 10.8 14.2 3.6

SG&A (% of Revenue) 11.3 13.7 17.9 9.8 10.0

R&D (% of Revenues) 2. 2 2.3 1.9 1.0 2.3 Depreciation (% of Revenues) 4.7 2.9 22

. 5 2.8 3.0 Capital Expenditures (% of Revenues) 2.7 1.6 3.1 4.3 3.2 Net Property, Plant, and Equipment (% of Revenues) 17.7 16.7 14.9 24.9 17.4

During interviews, manufacturers were asked to provide their own figures for the parameters listed in Table 12.4

. 1

. DOE adjusted the depreciation and capital expenditures according to the manufacturers’ feedback.

12.4.4 Corpora te Discount Rate

DOE used the weighted

- average cost of capital (WACC) as the discount rate to calculate the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is the total cost of debt and equity weighted by their respecti ve proportions in the capital structure of the industry. DOE estimated the WACC for the residential clothes washer industry based on several representative companies, using the following formula:

WACC = After

- Tax Cost of Debt x (Debt Ratio) + Cost of Equ ity x (Equity Ratio) Eq. 112-12

The cost of equity is the rate of return that equity investors (including, potentially, the company) expect to earn on a company’s stock. These expectations are reflected in the market price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used means to estimate the cost of equity. According to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium Eq. 2

where:

Riskless rate of return is the rate of return on a “safe” benchmark investment, typically

considered the short

- term Treasury Bill (T

- Bill) yield.

Risk premium is the difference between the expected return on stocks and the riskless

rate.

Beta (β) is the correlation between t he movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated with the S&P 500

market index. A Beta lower than one means the stock is less volatile than the market index.

DOE dete rmined that the industry average cost of equity for the residential clothes washer industry is 20.6 percent ( Table 12.4

. 2 ).

Table 12.4

. 2 Cost of Equity Calculation

Parameter Industry

Weighted Average

% Manufacturer

A B C D

(1) Average Beta (2002

- 2006 year) 1.79 1.0 1.46 1.80 1.99

(2) Yield on 10

- Year

T

- Bill (1990

- 200 7 ) 4.13

- - - -

(3) Market Risk Premium (1926

- 1999) 9.2

- - - -
Cost of Equity (2)+[(1)*(3)] 20.6

- - - - Equity/Total Capital 37.2 38

. 2 64.8 75.0 59.4

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. One way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis points) over the ri sk

- free rate. DOE used this

method to calculate the cost of debt for all three manufacturers by using S&P ratings and adding

the relevan t spread to the risk

- free rate.12-13

In practice, investors use a variety of different maturity Treasury bonds to estimate the

risk

- free rate. DOE used the 10

- year Treasury bond return because it captures long

- term inflation expectations and is less volatile than short

- term rates. The risk free rate is estimated to be approximately 4 percent, which is the average 10

- year Treas ury bond return between 1990 and 2007 (the analysis period used in the initial estimate for commercial clothes washers).

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for the three public manufacturers betwee n 2002 and 2006. As stated above, the representative data was taken from the commercial clothes washer final rule since several of the representative manufacturers are the same as in the residential clothes washer industry. DOE added the industry

- weighted average spread to the average T

- Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry average tax rate to determine the net cost of debt for the industry. Table 12.4

. 3 presents the derivation of the cost of debt and the capital structure of the industry ( i.e. the debt ratio (debt/total capital) )

.

Table 12.4

. 3 Cost of Debt Calculation

Parameter Industry

Weighted Average

% Manufacturer

A B C D

S&P Bond Rating

-- B BBB BB B+

(1) Yie ld on 10

- Year

T

- Bill (1990

- 2006) 4.3

- - - -

(2) Gross Cost of Debt 8.6 9.78 6.63 7.78 8.63

(3) Tax Rate 34.3 33.5 47.3 22.5 33.3

Net Cost of Debt (2) x ((1)

- (3)) 5.7

- - - -

Debt/Total Capital 32.9 38

. 2 64.8 75.0 59.4

Using public information for these three companies from the commercial clothes washer final rule, the initial estimate for the residential clothes washer industry’s WACC was approximately 10.1 percent. Subtracting an inflation rate of 2.9 percent over the analysis period

used in the initial estimate , the inflation

- adjusted WACC and the initial estimate of the discount

rate use d in the straw

- man GRIM is 8.0 percent. DOE also asked for feedback on the 8.0 percent discount during manufacturer interviews and slightly adjusted this figure for the residential

clothes washers’ GRIM.

12.4.5 Trial Standard Levels

DOE developed TSLs for reside ntial clothes washers

. For residential clothes washers, DOE analyzed four product classes

– standard top

- loading residential clothes washers, standard

front

- loading residential clothes washers, compact top

- loading residential clothes washers, and compact f ront

- loading residential clothes washers. Table 12.4

. 4 presents the TSLs and the12-14

corresponding product class efficiency levels for residential clothes washers based o n modified energy factor (MEF) and water factor (WF) according to the current test procedure (appendix J1). Table 12.4

. 5 presents the TSLs and the corresponding produ ct class efficiency levels based on integrated modified energy factor (IMEF) and integrated water factor (WF) according to the revised test procedure (appendix J2) published in the Federal Register on March 7, 2012

. 77 FR

13888.

TSL 1 consists of the eff iciency levels that are two steps up in efficiency (EL 2) from the

baseline levels for standard clothes washers, and one step up in efficiency (EL 1) from baseline levels for compact products

. For standard clothes washers, TSL 2 represents an intermediary point between the efficiency levels chosen for TSL 1 and the efficiency levels recommended in

the Joint Petition , and maintains the same efficiency levels for compact products as in TSL 1. TSL 3 consists of the efficiency levels recommended in a j o int p etition submitted by interested parties to DOE d (“Joint Petition”). The Joint Petition proposes energy efficiency standards for four residential clothes washer product classes. In the case of TSL 3, for top

- loading standard clothes washers, a first tier of standards would apply starting in 2015, a second, more stringent

tier would apply starting in 2018. TSL 4 consists of the efficiency levels that are one level below (EL 7) the max

- tech efficiency levels (EL 8) for standard clothes washers, and the max

- tec h efficiency levels for both compact product classes . TSL 5 consists of the max

- tech efficiency

levels for all product classes

.

Table 12.4

. 4 Trial Standard Levels fo r Residential Clothes Washers (Using A ppen dix J1)

Product Class Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Standard

- Size Top

- Loading MEF 1.26 1.72 1.80 2.00 2.26 2.47

WF 9.50 8.00 7.50 6.00 4.48 3.60

Standard

- Size Front

- Loading MEF 1.72 1.72 2.00 2.20 2.60 2.89

WF 8.00 8.00 6.00 4.50 3.80 3.20
Compact Top

- Loading MEF 0.77 1.26 1.26 1.81 1.81 1.81

WF 14.0 14.0 14.0 11.6 11.6 11.6
Compact

- Size Front

- Loading MEF 1. 60 1.72 1.72 1.72 1.72 1.72

WF 8.5 8.0 8.0 8.0 8.0 8.0

* See 10 CFR part 430 (31 October 2003), pp. 62198

– 62204

d “Agreement on Minimum Federal Efficiency Standards, Smart Appliances, Federal Incentives and Related Matters for Specified Appliances,” DOE Docket No. EERE

– 2008

– BT

– STD

– 0019, Comment 32. DOE considered the Joint Petitioners’ comments to supersede earlier co mments by the listed parties regarding issues subsequently discussed in

the Joint Petition.12-15

Table 12.4

. 5 Trial Standard Levels for Residential Clothes Washers (Using Appendix J2)

Product Class Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Standard

- Size Top

- Loading I MEF 0.84 1.29 1.37 1.57 1.83 2.04

I WF 9.92 8.44 7.95 6.47 4.96 4.10

Standard

- Size Front

- Loading I MEF 1.37 1.4 1 1.66 1.84 2.20 2.46

I WF 8.31 8.31 6.26 4.73 4.01 3.39 Compact Top

- Loading IMEF 0.59 0.86 0.86 1.15 1.15 1.15

IWF 14.4 14.4 14.4 12.0 12.0 12.0 Compact

- Size Front

- Loading IMEF 1.03 1.13 1.13 1.13 1.13 1.13

IWF 8.8 8.3 8.3 8.3 8.3 8.3

* See 10 CFR part 430 (21 September 2010), pp. 57556

- 57595

12.4.6 NIA Shipments Forecast

The GRIM estimates manufacturer revenues based on total

- unit

- shipment s forecasts and the distribution of these values by efficiency level. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this analysis, the GRIM used the NIA shipments forecasts from 2011 to 204 4 for resident ial clothes washers . Chapter 10 of the TSD explains DOE’s calculations of total shipments in detail. Table 12.4

. 6 shows total shipments forecasted in the shipment s ana lysis for residential clothes washers in 2015.

Table 12.4

. 6 Total NIA Shipments Forecast in 2015 in the Reference NIA Shipment Scenario (Residential Clothes Washers)

Product Class Total Industry Shipments

Standard

- Size Top

- Loading 4, 324 ,0 91

Standard

- Size Front

- Loading 5,158,278 Compact

- Size Top

- Loading 95,984 Compact

- Size Front

- Loading 20,000

12.4.6.1 Base

- Case Shipments Forecast

As part of the shipment s analysis, DOE estimated the shipment distribution s by efficiency level for residential clothes washers

. DOE held the base

- case energy efficiency distributions constant throughout the forecast period. Table 12.4

. 7 sho ws the base

- case distributions of shipments by efficiency level estimated in the NIA for the residential clothes washer product classes.12-16

Table 12.4

. 7 Base

- Case Distributions of Efficiencies for Residential C lothes Washers in

2015

Product Class Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 EL 8

Standard

- Size Top

- Loading IMEF 0.84 0.98 1.29 1.34 1.34 1.37 1.57 1.83 2.04

% of the

Market at EL 43.6 43.6 1.9 0.6 0.6 0.6 4.6 4.6 0.0

Standard

- Size

Front

- Loading IMEF 1.37 1.39 1.41 1.49 1.66 1.84 2.02 2.20 2.46

% of the

Market at EL 0.0 0.0 0.0 4.3 24.0 48.9 11.4 11.4 0.0

Compact

- Size Top

- Loading IMEF 0.59 0.86 1.15

% of the

Market at EL 100.0 0.0 0.0

Compact

- Size Front Loading IMEF 1.03 1.13

% of the

Market at EL 100.0 0.0

12.4.6.2 Standards

- Case Shipments Forecast

To examine the effects of amended energy conservation standards on shipments, which affect the INPV, DOE used the base

- case shipments described in the previous section. For the standards case, DOE used the shipments developed in the NIA for residential clothes washers.

DOE used a roll

- up scenario to determine efficiency distributions for the standards case. In this scenario, products that fall below the amended energy conservation standard are assum ed to

“roll

- up” to the new standard in 2015.

DOE also assumed there was relative price elasticity in the residential clothes washer market, meaning that amended energy conservation standards that increase the first cost of residential

clothes washers woul d result in lower total shipments

.

12.4.7 Production Costs

The changes in the MPCs of the analyzed products can affect revenues, gross margins, and cash flow of the industry, making these product cost data key GRIM inputs for DOE’s analysis.DOE used the manufact urer production costs (MPCs) calculated in the engineering analysis for each efficiency level, as described in chapter 5 of the direct final rule TSD. DOE used the AHAM data submittal to determine the MPCs at most efficiency levels for top

- loading

and fron t

- loading standard

- size product classes . To supplement the AHAM submittal and

calculate max

- tech MPCs for these product classes , DOE also conducted product tear downs to generate MPCs using a manufacturing cost model. DOE also created separate cost curves for

top

- loading and front

- loading compact product classes using a combination of tear

- downs to develop baseline MPCs and the incremental costs for the standard product classes. The cost model also provided a breakdown of MPCs into material, labor, overhead, and depreciation that DOE applied to the AHAM

- provided MPCs at each efficiency level . The top

- loading standard clothes washer breakdown was also applied to the top

- loading compact MPCs and the front

-12-17

loading standard clothes washer breakdown was used for the front

- loading compact product

class

.

DOE used the AHAM data submittal to determine the MPCs at most efficiency levels. To supplement the AHAM submittal and calculate max

- tech MPCs, DOE also conducted product

tear downs to generate cost

- efficiency curves for the top

- loading standard and front

- loading standard product classes. These cost

- efficiency relationships were compared to AHAM data and

manufacturer feedback for validation

. The cost model provided a breakdown o f MPCs into material, labor, overhead, and depreciation that DOE applied to the AHAM

- provided MPCs at each efficiency lev el.

M anufacturing a higher

- efficiency product is typically more costly than manufacturing a baseline product due to the use of more c omplex components and higher

- cost raw materials. The changes i n the MPC s of the analyzed products can affect revenues

, gross margins , and cash flow of the industry, making these data a key GRIM input for DOE’s analysis.

The GRIM also included DOE’s estim ate of the proportion of costs devoted to labor, materials, overhead, and depreciation that make up the full cost of production

. For the MPC breakdown in the MIA, DOE used a depreciation value that is consistent with historical

information in SEC 10

- Ks. Th e remainder of total overhead was allocated to factory overhead. To calculate the incremental MPCs for products above the baseline, DOE added the incremental material, labor, and overhead costs from the engineering cost

- efficiency cu rves to the baseline

MP Cs.

The MSP is comprised of production costs (the direct manufacturing costs or MPCs),

non

- production costs (indirect costs like SG&A), and profit. DOE calculated the MSPs for

residential clothes washers by multiplying the MPCs by the appropriate manufa c turer markup for that product. Table 12.4

. 8 through Table 12.4

. 11 show the production cost estimates used in the GRIM for the representative product classes for residential clothes washers

.

Table 12.4

. 8 MPC Breakdown for Standard

- Size Top

- Loading Clothes Washers

TSL (Efficiency Level) I M EF Labor $ Material

$ Overhead

$ Depreciation

$ MPC

$ M fr. Markup MSP

$

Baseline 0.84 46.53 154.00 33.53 13.60 247.65 1.22 302.13 TSL 1 (EL 2 ) 1.29 47.93 160.37 33.73 14.06 256.09 1.22 312.43 TSL 2 (EL 5 ) 1.37 49.69 164.20 33.61 14.38 261.88 1.22 319.50

TSL 3 (EL 6) 1.57 52.14 172.13 33.68 14.98 272.93 1.26 343.90 TSL 4 (EL 7 ) 1.83 50.19 206.23 34.95 16.93 308.30 1.30 400.79 TSL 5 (EL 8 ) 2.04 34.19 234.62 31.20 17.43 317.44 1.30 412.6712-18

Table 12.4

. 9 MPC Breakdown for Standard

- Size Front

- Loading Clothes Washers

TSL (Efficiency Level) I M EF Labor $ Material

$ Overhead

$ Depreciation

$ MPC

$ M fr. Markup MSP

$

Baseline 1.37 58.13 390.62 40.94 28.45 518.13 1.22 632.12 TSL 1 (EL 2) 1.46 58.13 391.80 40.87 28.51 519.31 1.22 633.55 TSL 2 (EL 4 ) 1.66 59.43 395.26 40.86 28.79 524.33 1.26 660.65 TSL 3 (EL 5 ) 1.84 60.54 404.34 41.11 29.39 535.38 1.30 695.99 TSL 4 (EL 7) 2.20 64.49 438.50 37.61 31.40 572.01 1.30 743.61 TSL 5 (EL 8) 2.46 66.95 449.70 42.51 32.48 591.64 1.30 769.13

Table 12.4

. 10 MPC Breakdown for Compact

- Size Top

- Loading Clothes Washers

TSL (Efficiency Level) I M EF Labor $ Material

$ Overhead

$ Depreciation

$ MPC

$ M fr. Markup MSP

$

Baseline 0.59 47.09 155.88 33.94 13.76 250.68 1.22 305.83 TSL 1 (EL 1) 0.86 47.97 159.42 34.26 14.04 255.68 1.22 311.93 TSL 2 (EL 1 ) 0.86 47.97 159.42 34.26 14.04 255.68 1.22 311.93 TSL 3 (EL 2 ) 1.15 55.34 185.17 38.94 16.23 295.68 1.22 360.73 TSL 4 (EL 2) 1.15 55.34 185.17 38.94 16.23 295.68 1.22 360.73 TSL 5 (EL 2) 1.15 55.34 185.17 38.94 16.23 295.68 1.22 360.73

Table 12.4

. 11 MPC Breakdown for Compact

- Size Front

- Loading Clothes Washers

TSL (Efficiency Level) I M EF Labor $ Material

$ Overhead

$ Depreciation

$ MPC

$ M fr. Markup MSP

$

Baseline 1.03 57.86 388.83 40.75 28.31 515.75 1.22 629.22 TSL 1 (EL 1) 1.13 57.76 392.05 40.46 28.48 518.75 1.22 632.88 TSL 2 (EL 1 ) 1.13 57.76 392.05 40.46 28.48 518.75 1.22 632.88 TSL 3 (EL 1 ) 1.13 57.76 392.05 40.46 28.48 518.75 1.22 632.88 TSL 4 (EL 1) 1.13 57.76 392.05 40.46 28.48 518.75 1.22 632.88 TSL 5 (EL 1) 1.13 57.76 392.05 40.46 28.48 518.75 1.22 632.88

12.4.8 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur one

- time conversion costs to bring their production facilities and product designs into compliance with new regulations. For the MIA, DOE classified these one

- time conversion cost s into two major groups: capital conversion costs and product conversion costs. Capital conversion costs are one

time investments in PPE to adapt or change existing production facilities so that new product designs can be fabricated and assembled under the new regulation. Product conversion costs are

one

- time investments in research, development, testing, marketing and other costs to make product designs comply with amended energy conservation standards. The following sections describe the inputs DOE used i n the GRIM in greater detail.

12.4.8.1 Residential Clothes Washer Product and Capital Conversion Costs

Amended energy conservation standards will cause manufacturers to incur conversion costs to bring their production facilities and product designs into compliance . For the MIA, DOE classified these costs into two major groups: (1) product conversion costs and (2) capital12-19

conversion costs. Product conversion costs are investments in research, development, testing, marketing, and other non

- capitalized costs focused o n making product designs comply with the amended energy conservation standard. Capital conversion costs are investments in property, plant, and equipment to adapt or change existing production facilities so that new product designs can be fabricated and as sembled.

DOE based its conversion cost estimates that would be required to meet each TSL on the AHAM data submittal. At each efficiency level, DOE matched the IMEF efficiency level to the corresponding MEF metric and used the aggregated total industry ca pital and product conversion cost from the May 2010 AHAM submittal. DOE multiplied each aggregated capital and product conversion total by 1.05 to account for the non

- AHAM member shipments. For the new max

tech levels that were revised by DOE after the AHA M data submittal, DOE scaled the aggregated total conversion costs at the next lowest efficiency level by the same percentage increase in production costs. DOE did not increase the require product and capital conversion costs for efficiency levels that did not analyze changes to active mode efficiency. Using the AHAM data submittal for both the product and the capital conversion costs insures that the one

time costs required to meet amended energy conservation standards are consistent with the

incremental c os ts to reach those efficiencies.

DOE took a number of steps to understand the conversion costs in the AHAM data submittal. DOE reviewed the AHAM conversion costs during manufacturer interviews to understand the magnitude and cost of the required conversions for individual manufacturers.

D OE also reviewed public information in the CEC , ENERGY STAR, CEE product databases as well as manufacturer websites to understand which products manufacturers would upgrade at each efficiency level. DOE also reviewed the AHAM submittal in conjunction with the technology options and information learned during product teardowns for multiple product lines.

For the top

- loading compact product class, DOE scaled the top

- loading standard conversion costs for the same efficiency level by the relative number of co mpact platforms. DOE estimated the number of top

- loading standard and compact platforms using publicly available information from manufacturer websites and product databases as well as insights gained in the engineering analysis. DOE did not include conver sion costs for the front

- loading compact product classes because the design options analyzed to improve efficiency would require minimal changes to baseline products.

Table 12.4

. 12 through Table 12.4

. 15 show DOE’s estimates of the product and capital

conversion costs necessary for each residential clothes washer product class at each TSL

.12-20

Table 12.4

. 12 Product and Capital Conversion Costs for Standard

- Size Top

- Loading

Clothes Washers by TSL

TSL (Efficiency Level) IMEF De sign Option s Considered Product

Conversion

Costs 2010$ millions Capital

Conversion

Costs 2010$ millions

Baseline 0.84 0.0 0.0

TSL 1 (EL 2 ) 1.29 Agitator modification Basket shape modification

Electronic controls Higher spin speeds Larger capacity

Load size sensors

More advanced water inlets Spray rinse

Stainless steel basket Variable speed drive Water temperature sensors (Thermistors) 21.2 79.7

TSL 2 (EL 5 ) 1.37 Higher spin speeds Larger capacity Pressure switch accuracy improvement

Stronger basket 29.3 91.3

TSL 3 (EL 6) 1.57 Adaptive fill technology Agitator replaced by impeller High suspension Higher spin speeds Larger capacity Longer cycle times Lower water temperatures

More mechanical action More sensing technology More sophisticated electronic control

Out of balance detection Recirculation pumps

Stainless steel basket 66.3 117.0

TSL 4 (EL 7 ) 1.83 Absorption sensors

Accelerometers

Better motor Better temperature control Gray water rinse Higher capacity Higher chemical concentration Highest spin speeds Load composition sensors Longer cycle times

More mechanical action More robust suspension system Most sophisticated load detection

Tachometer

Water flow meters 92.1 185.012-21

TSL 5 (EL 8 ) 2.04 No information provided by

manufacturers 94.8 190.5

Table 12.4

. 13 Product and Capital Conversion Costs for Standard

- Size Front

- Loading

Clothes Washers by TSL

TSL (Efficiency Level) IMEF Design Option s Considered Product

Conversion

Costs 2010$ millions Capital

Conversion

Costs 2010$ millions

Baseline 1.37 0.0 0.0

TSL 1 (EL 2) 1.41 Electronic user interface 0.0 0.0

TSL 2 (EL 4 ) 1.66 Larger capacity Recirculation pump Better control technology 10.9 14.9

TSL 3 (EL 5 ) 1.84 Sophisticated damping system Analog pressure sensors

Water flow meter Higher spin speeds Longer cycle time

Reinforced structure Larger capacity 38.2 182.8

TSL 4 (EL 7) 2.20 Larger capacity Recirculation pump Better control technology 109.3 291.2

TSL 5 (EL 8) 2.46 More precise dispensing of chemicals

Load size sensors Fuzzy logic 113.0 301.212-22

Table 12.4

. 14 Product and Capital Conversion Costs for Compact

- Size Top

- Loading

Clothes Washers by TSL

TSL (Efficiency Level) IMEF Design Option s Considered Product

Conversion

Costs 2010$ millions Capital

Conversion

Costs 2010$ millions

Baseline 0.59 0.0 0.0

TSL 1 (EL 1 ) 0.86 Spray Rinse Larger Capacity

Eliminate Warm Rinse Reduced Water Temperatures 1.4 1.5

TSL 2 (EL 1 ) 0.86 Spray Rinse Larger Capacity

Eliminate Warm Rinse Reduced Water Temperatures 1.4 1.5

TSL 3 (EL 2) 1.15 Electronic Controls Improved Fill Level Control Improved Temperature Control

More Efficient Motor

Stainless Steel Wash basket

Water Recirculation 3.0 11.2

TSL 4 (EL 2 ) 1.15 Electronic Controls Improved Fill Level Control Improved Temperature Control

More Efficient Motor

Stainless Steel Wash basket

Water Recirculation 3.0 11.2

TSL 5 (EL 2 ) 1.15 Electronic Controls Improved Fill Level Control Improved Temperature Control

More Efficient Motor

Stainless Steel Wash basket

Water Recirculation 3.0 11.212-23

Table 12.4

. 15 Product and Capital Conversion Costs for Compact

- Size Front

- Loading

Clothes Washers by TSL

TSL (Efficiency Level) IMEF Design Option s Considered Product

Conversion

Costs 2010$ millions Capital

Conversion

Costs 2010$ millions

Baseline 1.03 0.0 0.0

TSL 1 (EL 1 ) 1.13 Improved Fill Level Control Low Standby Power Control Board 0.0 0.0

TSL 2 (EL 1 ) 1.13 Improved Fill Level Control Low Standby Power Control Board 0.0 0.0

TSL 3 (EL 1) 1.13 Improved Fill Level Control

Low Standby Power Control Board 0.0 0.0

TSL 4 (EL 1 ) 1.13 Improved Fill Level Control Low Standby Power Control Board 0.0 0.0

TSL 5 (EL 1 ) 1.13 Improved Fill Level Control Low Standby Power Control Board 0.0 0.0

12.4.9 Markup Scenarios

DOE used several standards case markup scenarios to represent the uncertainty about the impacts of amended energy conservation standards on prices and profitability. In the base case, DOE used the same baseline markups calculated in the engineering analysi s for all product classes. In the standards case, DOE modeled three markup scenarios to represent the uncertainty about the potential impacts on prices and profitability following the implementation of amended energy conservation standards : (1) a no commod itization markup scenario, (2) a tiered markup scenario, and (3) and a tiered markup with margin pressure scenario.

. These scenarios lead to different markups values, which, when applied to the inputted MPCs, result in varying revenue and cash flow impacts

.

MSP is equal to MPC times a manufacturer markup. The MSP include s direct manufacturing production costs ( i.e.

, labor, material, and overhead estimated in DOE’s MPCs)

and all non

- production costs ( i.e.

, SG&A, R&D, and interest), along with profit.

To calculate the baseline manufacturer markup, DOE evaluated publicly available financial information for manufacturers of major household appliances whose product offerings include residential clothes washers. DOE also requested feedback on the 1.22 baseline manufacturer markup during manufacturer interviews. In the base case for all three GRIM markup scenarios, DOE assumed that the products that meet the January 2011 ENERGY STAR criteria earn a moderately higher manufacturer markup than “baseline” products t hat fall below

those efficiencies. Additionally, products that meet the CEE Tier 2 and Tier 3 criteria earn an incrementally higher markup than those that meet the 2011 ENERGY STAR criteria.

For the MIA, DOE modeled three standards

- case markup scenarios to represent the uncertainty regarding the potential impacts on prices and profitability for manufacturers12-24

following the implementation of amended energy conservation standards : (1) a no commoditization markup scenario, (2) a tiered markup scenario, and (3 ) and a tiered markup with margin pressure scenario. Modifying these markups from the base case to the standards cases yields different sets of impacts on manufacturers’ changing industry revenue and cash

flow.

12.4.9.1 No Commoditization Scenario

The no commoditi zation scenario assumes that the base

- case markup structure (with baseline, ENERGY STAR, and CEE Tier 2 and Tier 3 markups) is maintained in the standards case. This scenario represents the upper bound of industry profitability because manufacturers

are ab le to fully pass through additional costs from amended standards to their customers. In addition to fully passing through higher production costs, manufacturers continue to earn premium markups after standards for products that are no longer differentiated by the ENERGY STAR and CEE programs.

12.4.9.2 Tiered Markup Scenario

The tiered markup scenario also starts with the three different product markups in the

base case (baseline, ENERGY STAR, and CEE Tier 2 and Tier 3 markups). In the standards case, the tiered markup scenario considers the situation in which the breadth of a manufacturer’s portfolio of products shrinks and amended standards result in higher

- tier product s moving to lower tiers. As a result, higher efficiency products that previously commanded the ENERGY STAR and CEE Tier 2 and Tier 3 markups are assigned the ENERGY STAR and baseline markups, respectively. This scenario models a reduction in markups that m anufacturers may experience as standards increase and reflects one of the industry’s key concerns about product commoditization at higher efficiency levels as efficiency differentiators are eliminated

Table 12.4

. 16 through Table 12.4

. 19 list the products DOE analyzed with the corresponding markups at each TSL for residential cloth es washers

.12-25

Table 12.4

. 16 Tiered Markups for Standard

- Size Top

- Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.25 ) 1.220

EL 1 ( 1.34 ) 1.220

EL 2 ( 1.53 ) 1.220 1.220

EL 3 ( 1.56 ) 1.220 1.220 1.220

EL 4 ( 1.56 ) 1.220 1.220 1.220

EL 5 ( 1.58 ) 1.220 1.220 1.220

EL 6 ( 1.70 ) 1.260 1.260 1.260 1.220

EL 7 (1.86) 1.300 1.300 1.300 1.260 1.220

EL 8 (1.98) 1.300 1.300 1.300 1.260 1.260 1.220

Table 12.4

. 17 Tiered Markups for Standard

- Size Front

- Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220

EL 1 ( 1.59 ) 1.220

EL 2 ( 1.63 ) 1.220 1.220

EL 3 ( 1.70 ) 1.220 1.220

EL 4 ( 1.87 ) 1.260 1.260 1.220

EL 5 ( 2.03 ) 1.300 1.300 1.260 1.220

EL 6 ( 2.20 ) 1.300 1.300 1.260 1.260

EL 7 (2.37) 1.300 1.300 1.260 1.260 1.220

EL 8 (2.61) 1.300 1.300 1.260 1.260 1.260 1.22012-26

Table 12.4

. 18 Tiered Markups for Compact

- Size Top

- Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220 1.220 1.220

EL 1 ( 1.59 ) 1.220 1.220 1.220 1.220

EL 2 ( 1.63 ) 1.220 1.220 1.220 1.220 1.220 1.220

Table 12.4

. 19 Tiered Markups for Compact

- Size Front

- Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220 1.220 1.220

EL 1 ( 1.59 ) 1.220 1.220 1.220 1.220 1.220 1.220

12.4.9.3 Tiered Markups with Margin Pressure Markup Scenario

DOE also modeled a lower bound profitability scenario. In the tiered markup with margin pressure scenario, the markups of products that exceed the minimum energy conservation standards similarly move to lower efficiency tiers as standards eliminate current efficiency differentiators. In this scenario, the manufacturer markups at the new minimum standard are also lowered. For both top

- loading and front

- loading clothes washers, manufacturers are able to maintain only the operating profit of the baseline produ ct in absolute dollars. For products at the new minimum energy conservation standards, the higher production costs and the investments required to comply with the amended energy conservation standard do not yield additional operating profit. This scenario models concerns that higher production costs for minimally compliant products could greatly hurt manufacturer profitability because a large segment of the market is greatly impacted by increases in first costs and there would be tremendous pressure to keep entry level products close to today’s prices.12-27

Table 12.4

. 20 Tiered Markups with Margin Pressure Markup for Standard

- Size Top

Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.25 ) 1.220

EL 1 ( 1.34 ) 1.220

EL 2 ( 1.53 ) 1.220 1.218

EL 3 ( 1.56 ) 1.220 2.220

EL 4 ( 1.56 ) 1.220 2.220

EL 5 ( 1.58 ) 1.220 2.220 1.217

EL 6 ( 1.70 ) 1.300 1.300 1.300 1.214

EL 7 (1.86) 1.380 1.380 1.380 1.300 1.207

EL 8 (1.98) 1.380 1.380 1.380 1.300 1.300 1.206

Table 12.4

. 21 Tiered Markups with Margin Pressure Markup for Standard

- Size Front

Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220

EL 1 ( 1.59 ) 1.220

EL 2 ( 1.63 ) 1.220 1.220

EL 3 ( 1.70 ) 1.220 1.220

EL 4 ( 1.87 ) 1.300 1.300 1.219

EL 5 ( 2.03 ) 1.380 1.380 1.300 1.218

EL 6 ( 2.20 ) 1.380 1.380 1.300 1.300

EL 7 (2.37) 1.380 1.380 1.300 1.300 1.214

EL 8 (2.61) 1.380 1.380 1.300 1.300 1.300 1.21212-28

Table 12.4

. 22 Tiered Markups with Margin Pressure Markup for Compact

- Size Top

Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220 1.220 1.220

EL 1 ( 1.59 ) 1.220 1.220 1.220 1.220

EL 2 ( 1.63 ) 1.220 1.220 1.220 1.220 1.220 1.220

Table 12.4

. 23 Tiered Markups with Margin Pressure Markup for Compact

- Size Front

Loading Clothes Washers

EL (I M EF) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline ( 1.55 ) 1.220 1.220 1.220

EL 1 ( 1.59 ) 1.220 1.220 1.220 1.220 1.220 1.220

12.5 INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated indicators of financial impacts on the residential clothes washer industr y . The main results of the MIA are also reported in this section. The MIA cons ists of two key financial metrics: INPV and

annual cash flows.

12.5.1 Introduction

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs in the standards case . The INPV is different from DOE’s NPV, which

is applied to the U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost of capital

, or discount rate. The residential clothes washer GRIM estimates cash

flows from 20 11 to 2044. This timeframe models both the short

- term im pacts on the industry from the announcement of the standard until the compliance date and a long

- term assessment

over the 30

- year analysis period used in the NIA (2015

– 2044)

.

In the MIA, DOE compa res the INPV of the base case (no amended energy conservation standards) to that of each TSL in the standards case . The difference between the base case and a standards case INPV is an estimate of the economic impacts that implementing that particular

TSL would have on the industry. For the residential clothes washer industry, DOE examined the

three markup scenarios described above: the flat markup, the preservation of operating profit, and the tiered markup. While INPV is useful for evaluating the long

- ter m effects of amended12-29

energy conservation standards, short

- term changes in cash flow are also important indicators of the industry’s financial situation. For example, a large investment over one or two years could strain the industry’s access to capital. Co nsequently, the sharp drop in financial performance could cause investors to flee, even though recovery may be possible. Thus, a short

- term disturbance can have long

- term effects that the INPV cannot capture. To get an idea of the

behavior of annual net ca sh flows, Figure 12.5

. 1 through Figure 12.5

. 3 below present the annual

net or free cash flows from 2010 through 2025 for the base case and different TSLs in the

standards case.

Annual cash flows are discounted to the base year, 2011. Between 2011 and the 2015 compliance date of the amended energy conservation standard, cash flows are driven by the level

of conversion costs and the proportion of these investments spent every year. After the standard

announcement date ( i.e. , the publication date of the final rule) , industry cash flows begin to decline as companies use their financial resources to prepare for the amended energy

co nservation standard. The more stringent the amended energy conservation standard, the greater the impact on industry cash flows in the years leading up to the compliance date, as product conversion costs lower cash inflows from operations and capital conve rsion costs increase cash

out flows for capital expenditures.

Free cash flow in the year the amended energy conservation standards take effect is driven by two competing factors. In addition to capital and product conversion costs, amended

energy conserva tion standards could create stranded assets, i.e. , tooling and equipment that would have enjoyed longer use if the energy conservation standard had not made them obsolete. In this year, manufacturers write down the remaining book value of existing tooling and equipment whose value is affected by the amended energy conservation standard. This one time write down acts as a tax shield that alleviates decreases in cash flow from operations in the year

of the write

- down. In this year, there is also an increase i n working capital that reduces cash flow from operations. A large increase in working capital is needed due to more costly production components and materials, higher inventory carrying to sell more expensive products, and higher

accounts receivable for mo re expensive products. Depending on these two competing factors, cash flow can either be positively or negatively affected in the year the standard takes effect.

In the years following the compliance date of the standard, the impact on cash flow depends on the operating revenue. More stringent TSLs typically have a positive impact on cash flows relative to the base case under the flat markup scenario because manufacturers are able to earner higher operating profit at each TSL in the standards case, which increases cash flow from operations

. There is very little impact on cash flow from operations under the preservation of operating profit scenario because this scenario is calibrated to have the same operating income in

the standards case at each TSL as the base case as in the year after the standard takes effect. In this scenario, the industry value is impacted because production costs increase, but operating profit remains approximately equal to the base case which decreases profit margins as a

perce ntage of revenue.12-30

12.5.2 Residential Clothes Washer Industry Financial Impacts

Table 12.5

. 1 through Table 12.5

. 3 provide the INPV estimates for the residential clothes

washers. Figure 12.5

. 1 through Figure 12.5

. 3 present the annual net cash flows for residential

clothes washers for each of the different markup scenarios.

Table 12.5

. 1 Manufacturer Impact Analysis for Residential Clothes Washers

– No Commoditization Markup Scenario

Units Base Case Trial Standard Level

1 2 3 4 5

INPV (2010 $

millions) 2,585.7 2,529.4 2,571.3 2,682.0 2,790.7 2,841.2

Change in

INPV (2010 $

millions) - (56.3) (14.3) 96.4 205.0 255.5

(%)

- - 2.2%

- 0.6% 3.7% 7.9% 9.9%

*For tables in section Error! Reference source not found. , values in parenthesis indicate negative numbers

Table 12.5

. 2 Manufacturer Impact Analysis for Residential Clothes Washers

– Tiered Markup Scenario

Units Base Case Trial Standard Level

1 2 3 4 5

INPV (2010 $

millions) 2,585.7 2,529.4 2,110.0 1,762.8 1,453.0 1,417.5

Change in

INPV (2010 $

millions) - (56.3) (475.7) (822.9) (1,132.7) (1,168.1)

(%)

- - 2.2%

- 18.4%

- 31.8%

- 43.8%

- 45.2%

Table 12.5

. 3 Manufacturer Impact Analysis for Residential Clothes Washers

– Tiered Markup Scenario with Margin Impacts

Units Base Case Trial Standard Level

1 2 3 4 5

INPV (2010 $

millions) 2,585.7 2,521.7 2,095.3 1,726.9 1,329.3 1,250.4

Change in

INPV (2010 $

millions) - (64.0) (490.3) (858.8) (1,256.4) (1,335.3)

(%)

- - 2.5%

- 19.0%

- 33.2%

- 48.6%

- 51.6%12-31

Figure 12.5

. 1 Annual Industry Net Cash Flows for Residential Clothes Washers (No Commoditization Markup Scenario)12-32

Figure 12.5

. 2 Annual Industry Net Cash Flows for Residential Clothes Wa shers (Tiered Markup Scenario)12-33

Figure 12.5

. 3 Annual Industry Net Cash Flows for Residential Clothes Washers (Tiered Markup Scenario with Margin Impacts)

12.6 IMPACTS ON SMALL RES IDENTIAL CLOTHES WAS HER

MANUFACTURERS

To estimate the number of small businesses w hich could be impacted by the amended energy conservation standards, DOE conducted a market survey using all available public information to identify potential small manufacturers. DOE’s research i ncluded the AHAM membership directory, product databases (CEE, CEC, and ENERGY STAR databases) and individual company websites to find potential small business manufacturers. DOE also asked stakeholders and industry representatives if they were aware of an y other small business manufacturers during manufacturer interviews and at previous DOE public meetings. DOE reviewed all publicly available data and contacted various companies, as necessary, to determine whether they met the SBA’s definition of a small b usiness manufacturer of covered residential clothes dryers or room air conditioners. DOE screened out companies that did not offer products covered by this rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated.

The majority of residential clothes washers are currently manufactured in the United States by one corporation that accounts for approximately 64 percent of the total market.12-34

Together, this and three other major manufacturers that are not small business ma nufacturers comprise 92 percent of the residential clothes washer market. The small portion of the remaining residential clothes washer market (approximately 700,000 shipments) is supplied by a combination of 12 international and domestic companies, all of which have small market shares.

DOE identified only one manufacturer that is considered a small business under NAICS Code 335224. The one small business manufacturer has one product platform. It makes a

standard

- size t op

- loading residential clothes wash er that meets a 1.85 MEF and a 6.75 WF. The product meets the 2015 energy conservation standards, but falls short of the 2018 standard. The unit does not offer warm rinse and has electromechanical controls, making it likely that three wash temperatures (ho t, warm, cold) are available on all settings including Normal for test procedure purposes. Thus, it is likely the unit will have to undergo alterations to its basic design to meet the 2018 efficiency requirements.

This company appears to manufacturer it s residential clothes washer with less automation and more labor than some of the larger competitors. In order to change the design of their current product to meet the 2018 efficiency standards, one available design pathway would be increasing

the volume of the wash baske t

— assuming there is enough clearance within the cabinet. Increasing the drum’s radius would only involve cutting slightly larger octagon

- shaped pieces of metal but would not be a capital intensive solution. With this pathway, the assembly process and fabrication time would essentially remain the same. This solution would also prevent the small business manufacturer from bearing the cost of retrofitting their manufacturing process and could result in lower per unit conversion costs relative to larger manufacturers. Additionally, since the small business manufacturer already meets the 2015 energy conservation standards, it would have nine years from the announcement of today’s direct final rule until it would have to make any changes to its cu rrent product in response to standards. Thus, DOE does not believe that this company would be disproportionately impacted by the standards established for residential clothes washers in today’s final rule. DOE also notes that the small business manufacture r accounts for less than one percent of the total residential clothes washer market share.

12.7 OTHER IMPACTS

12.7.1 Employment

For residential clothes washers, DOE used the GRIM to estimate the domestic labor expenditures and number of domestic production workers in the base case and at each TSL from

2011 to 204 4. DOE used statistical data from the most recent U.S. Census Bureau ’s 2009 Annual Survey of Manufacturers , the results of the engineering analysis, and interviews with

manufacturers to determine the inputs necessary to calculate industry

- wide labor expenditures and domestic employment levels. Labor expenditures for the manufacture of a product are a function of the labor intensity of the product , the sales volum e, and an assumption that wages in

r eal terms remain constant

.12-35

In the GRIM, DOE used the labor content of each product and the manufacturing production costs from the engineering analysis to estimate the annual labor expenditures in the residential clothes washer industry . DOE used Census data and interviews with manufacturers to estimate the portion of the total labor expenditures that is attributable to U.S. ( i.e. , domestic)

labor.

The production worker estimates in this section only cover workers up to the line

supervisor level who are directly involved in fabricating and assembling a product within an Original Equipment Manufacturer (OEM) facility. Workers perform ing services that are closely associated with production operations, such as material handing with a forklift, are also incl uded as production labor. DOE’s estimates only account for production workers who manufacture the specific produ cts covered by this rulemaking.

The employment impacts shown in Table 12.7

. 1 re present the potential production employment that could result following amended energy conservation standards. The upper end

of the results in this table estimates the maximum change in the number of production workers

after amen ded energy conservation standards must be met . The upper end of the results assumes manufacturers would continue to produce the same scope of covered products in the same production facilities. The upper end of the range also assumes that domestic producti on does not
shift to lower

- labor

- cost countries. Because there is a real risk of manufacturers evaluating sourcing decisions in response to amended energy conservation standards, the lower end of the range of employment results in Table 12.7

. 1 incl udes the estimated total number of U.S. production workers in the industry who could lose their job s if all existing production were moved outside of the United States

. While the results present a range of employment impacts following the compliance date of amended energy conservation standards, the discussion below also includes a qualitative discussion of the likelihood of negative employment impacts at the

various TSLs. Fina lly, t he employment impacts shown are independent of the employment impacts from the broader U.S. economy, which are documented in chapter 1 3, Employment Impact Analysis

, of the direct final rule TSD

.

The GRIM forecasts the residential clothes washer dom estic labor expendit ure for production labor in 2015 will be approximately $327.81 million. Using the $ 19.61 wage rate and 1,860 production hours per yea r per employee found in the 2009 ASM, the GRIM estimates there will be approximately 8,990 U.S. product ion employees involved in manufacturing

residential clothes washers covered by this rulemaking. In addition, DOE estimates that 738 non

production employees in the United States will support residential clothes washer production. e

e As defined in the 2009 ASM, production workers number include “workers (up through the line

- supervisor level) engaged in fabricating, processing, assembling, insp ecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product development, auxiliary production for plant's own use ( e.g. , power plant), recordkeeping, and other servi ces closely associated with these production operations at the establishment covered by the report. Employees above the working

- supervisor level are

excluded from this item.” Non

- production workers are defined as “employees of the manufacturing establishme nt including those engaged in factory supervision above the line

- supervisor level. It includes sales (including driver

-12-36

The employment spreadshee t of the residential clothes washer GRIM shows the annual domestic employment impacts in further detail. Approximately 70 percent of residential clothes washers sold in the United States are manufactured domestically.

Table 12.7

. 1 illustrates the range of potential impact s of amended energy conservation

standards on domestic production employment levels at each TSL for the residential clothes

washer market.

Table 12.7

. 1 Potential Changes in the Total Number of Domestic Residential Clothes

Washer Production Workers in 2015

Trial Standard Level

Baseline 1 2 3 4 5

Total Number of

Domestic Production

Wor kers in 2015 (without changes in production locations) 8,990 9,058 9,164 9,080 9,376 8,604

Potential Changes in

Dom estic Production

Workers in 2015 * - 68

- ( 8,8 90 ) 174

-

( 8,8 90 ) 90

-

( 8,8 90 ) 386

-

( 8,8 90 ) ( 386 )

-

( 8,8 90 )

*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

Figure 12.7

. 1 below shows total annual domestic employment levels for each TSL calculated by th e GRIM.

salespersons), sales delivery (highway truck drivers and their helpers), advertising, credit, collection, installation and servicing of o wn products, clerical and routine office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), professional, and technical employees. Also included are employees on the payroll of the manufacturing establishmen t engaged in the construction of major additions or alterations utilized as a separate work force.”12-37

Figure 12.7

. 1 Total Residential Clothes Washer Industry Domestic Employment by Year

All examined TSLs show relatively minor impacts on domestic employment levels relative to total industry employment. At all TSLs, most of the design options analyzed by DOE do not greatly alter the labor content of the final product. For example, more comp lex wash cycles or larger basket sizes involve one

- time changes to the final product but do not significantly change the number of steps required for the final assembly of the clothes washer (which would add labor). Because many manufacturers have recently introduced high efficiency products in the United States that meet or exceed the standards in today’s final rule, it is unlikely today’s direct final rule would greatly impact the sourcing decisions of these manufacturers. However, at higher TSLs, some of the design options analyzed greatly impact the ability of manufacturers to make product changes within existing platforms. The very large upfront capital costs at these levels (especially for introducing new f ront

- l oading clothes washer platforms)

could i nfluence the decision of manufacturers to relocate some or all of the domestic production

of these clothes washers to lower labor cost countries.

12.7.2 Production Capacity

Most shipments of top

- loading residential clothes washers fall below the 2015 and 2018

am ended energy conservation standards. However, in response to the EISA 2007 water factor requirements, multiple manufacturers have modified baseline products to comply with these more stringent regulations. These changes were incremental modifications to lo wer efficiency platforms. The 2015 efficiency requirements would also involve modifications to lower

- end platforms for top

- loading clothes washers for all manufacturers, but would similarly not require completely new platforms at a significantly higher upf ront cost. In addition, multiple manufacturers have recently introduced new top

- loading clothes washers that meet substantially higher efficiencies than lower

- end products at the baseline efficiency today. The introduction of these platforms greatly mitiga tes the required capital conversion costs for the industry to meet the 2018 top

- loading energy conservation standards. DOE believes that the mitigated capital12-38

conversion costs for manufacturers that have already introduced high efficiency top

- loading

cloth es washers in addition to the additional 3 years for all remaining manufacturers to meet the more aggressive standards for top

- loading clothes washers in 2018 will allow the industry to meet demand and continue to offer a full range of products after the c ompliance date.

More than 70 percent of front

- loading clothes washer shipments currently meet the front

- loading energy conservation standards in today’s direct final rule. In addition, every manufacturer that ships front

- loading clothes washers offers pr oducts at the amended energy conservation standard. Since manufacturers will not have to make extensive platform changes but will need to increase the production of existing product by the 2015 compliance date, the experience of multiple front

loading clot hes washer manufacturers that already produce standards

- compliant front

- loading clothes washers will allow the industry to meet the amended energy conservation standards proposed in the direct final rule.

12.7.3 Cumulative Regulatory Burden

While any one regulat ion may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have serious consequences for some manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single regulatio n may overlook this cumulative regulatory burden. For the cumulative regulatory burden analysis, DOE looks at other significant product

- specific regulations that could affect

residential clothes washer manuf acturers that will take effect three years before or after the compliance date of amended energy conservation standards for these products. In addition to the

amended energy conservation regulations on residential clothes washers , several other Federal regulations apply to these products and other equip ment produced by the same manufacturers. While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, DOE also has described a number of other regulations in section 12.7.3.3

and section 12.7.3 .4 because it recognizes that these regulations also impact the products covered by this rulemaking.

Companies that produce a wide range of regulated products may be faced with more capital and product development expenditures than competitors with a narrower scope of products. Regulatory burdens can prom pt companies to exit the market or reduce their product offerings, potentially reducing competition. Smaller companies in particular can be affected by regulatory costs since these companies have lower sales volumes over which they can amortize

the costs o f meeting new regulations. A proposed standard is not economically justified if it contributes to an unacceptable level of cu mulative regulatory burden.12-39 12.7.3.1 DOE Regulations for Other Products Produced by Residential

Clothes Washer Manufacturers

In addition t o the amended energy conservation standards on residential clothes washers

, several other Federal regulations and pending regulations apply to other products produced by the same manufacturers. DOE recognizes that each regulation can significantly affect a manufacturer’s financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the market. Table 12.7

. 2

list s the other DOE energy conservation standards that could also affect manufacturers of

residential clothes washers in the 3 years leading up to and after the compliance date of amended

ene rgy conservatio n standards for these products.12-40

Table 12.7

. 2 Other DOE and Federal Actions Affecting the Residential Clothes Washer Industry

Regulation Approximate

Compliance

Date* Number of Impacted

Companies from the Market and Technology Assessment (MTA) (See

C hapter 3) Estimated Total Industry

Conversion Costs

Packaged Terminal Air

Conditioners and Packaged Terminal Heat Pumps 2012 4 $17.3 million (2007$) f

Cooking Products 2012 12 $22.6 million (2006$) g

General Service Fluorescent Lamps and

Incandescent Reflector Lamps 2012 1 $363.1 million (2008$) h

Dehumidifiers 2012 4 N/A†

Commercial Clothes

Washers 2013 7 $20.4 million (2008$) i

Battery Chargers and External Power Supplies 2013* 1 N/A ††
ER, BR, and Small

Diameter IRLs 2014* 1 N/A †† Residential Refrigerators

and Freezers 2014* 13 N/A ††

Room Air Conditioners 2014* 6 N/A ††

Residential Clothes Dryers 2014* 16 N/A †† Fluorescent Lamp

Ballasts 2014* 1 N/A ††

Microwave Ovens 2 014 * 9 N/A ††

f Estimated i ndustry conversion expenses were pu blished in the TSD for the October 2008 packaged terminal air conditioners and packaged terminal heat pumps final rule. 73 FR 58772 . The TSD for the 2008 packaged terminal air conditioners and packaged terminal heat pumps final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_final_tsd.html

.

g Estimated industry conversion expenses were pu blished in the TSD for the April 2009 residential cooking products

final rule. 74 FR 16040 . The TSD for the 2009 residential cooking products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/cooking_products_final_rule_tsd.html

.

h Estimated industry conversion expenses were pu blished in the TSD for the July 2009 general service fluorescent lamps and incandescent reflector lamps final rule. 74 FR 3408 0 . The TSD for the 2009 lamps final rule can be found

at http://www1.eere.energy.gov/buildings/appliance_standards/residential/incandescent_lamps_standards_final_rule_ts

d.html

.

i Es timated industry conversion expenses were pu blished in the TSD for the January 2010 commercial clothes

washers final rule. 75 FR 1122 . The TSD for the 2010 commercial clothes washers final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/clothes_washers_ecs_final_rule_tsd.html12-41 Regulation Approximate

Compliance

Date* Number of Impacted

Companies from the Market and Technology Assessment (MTA) (See

C hapter 3) Estimated Total Industry

Conversion Costs

Metal Halide Lamp

Fixtures 2015* 1 N/A ††

Residential Clothes

Washers 2015* 16 N/A ††

Residential Water Heaters 2015 4 $95.9 million (2009$) j

Commercial Electric

Motors 2015* 1 N/A ††

Commercial Distribution

Transformers 2015 * 2 N/A †† Commercial Refrigeration Equipment 2016* 2 N/A †† High

– Intensity Discharge Lamps 2017* 1 N/A ††

Dishwashers 2018* 14 N/A †† *The dates listed are an approximation. The exact dates are pending final DOE action. † For minimum performance requirements prescribed by the Energy Independence and Security Act of 2007 (EISA 2007), DOE did not estimate total industry conversion costs because an MIA was not completed as part of a rulemaking. Pub. L. 110

- 140. EISA 2007 made numerous amendments to t he Energy Policy and Conservation Act (EPCA) of 1975, Pub. L. 94

- 163, (42 U.S.C. 6291

– 6309) , which established an energy conservation program for major household appliances and industrial and commercial equipment. †† For energy cons ervation standards for rulemakings awaiting DOE final action, DOE does not have a finalized estimated total industry conversion cost.

Some Federal DOE regulations have a more significant impact on manufacturers of

residential clothes washers than other s because manufacturers hold a significant market share in those covered products. Where market share and company financial data is available, DOE attempts to quantify the cumulative regulatory burden as measured by the fraction of corporate

revenues that are derived from the manufacture of products covered by other standards rulemakings. Table 12.7

. 3 below shows the DOE energy conservation standards with compliance

dat es within four years of residential clothes washers where manufacturers are expected to be most impacted due to their market positions. For these rulemakings, residential clothes washer manufacturers would likely be burdened by a significant portion of the estimated industry

conversion costs.

j Estimated industry conversion expenses were pu blished in the TSD f or the April 2010 heating products final rule.

75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://www1.eere .energy.gov/buildings/appliance_standards/residential/heating_products_fr_tsd.html

.12-42

Table 12.7

. 3 DOE Regulations on Products For Which Residential Clothes Washer Manufacturers Hold Significant Market Share

GE Whirlpool Electrolux

Revenue $150,211,000,000 $18,366,000,000 $16,492,000,000

Industry Sales Market

share % of

Revenue Market

share % of

Revenue Market

share % of

Revenue

Refrigerators and F reezers $10,310,000,000 21.8% 1.5% 23.8% 13.3% 23.4% 14.7 %

Residential Clothes Dryers $2,486,248,000 14.2% 0.24% 71.2% 9.64% 7.1% 1.1%

Room Air Conditioners $1,050,272,000 13% 0.74% 13% 0.85%

Residential Clothes Washers $3,373,042,000 16.0% 0.36% 64% 11.75% 6.0% 1.23%

Dishwashers $2,106,245,000 27.0% 0.38% 49% 5.6% 18.0% 2.3%

Cooking Products $4,491,117,000 44.0% 1.3% 15.4% 4.2%

Dehumidifiers $199,130,000 35% 0.38% 6.0% 0.07%

Microwave Ovens 1,376,667,000 4.0% 0.3%

Totals 3.78% 41.8% 24.3%

LG Haier Samsung

Revenue $51,432,900,000 $42,500,000,000 $142,631,000,000

Industry Sales Market

share % of

Revenue Market

share % of

Revenue Market

share % of

Revenue

Refrigerators and F reezers $10,310,000,000 9.4% 2.3%

Residential Clothes Dryers $2,486,248,000

Room Air Conditioners $1,050,272,000 32.0% 0.65% 8.0% 0.2 % 5% 0.04%

Residential Clothes Washers $3,373,042,000 6.0% 0.4%

Dishwashers $2,106,245,000

Cooking Products $4,491,117,000 27.4% 2.4%

Dehumidifiers $199,130,000 35.0% 0.14% 3.0% 0.004%

Microwave Ovens 1,376,667,000 35.0% 0.94% 12.0% 0.12%

Totals 4.5% 2.5% 0.16%

Where specific market share data was not available, DOE identified additional products manufacturers produced that are covered by additional efficiency standards as shown in Table

12.7

. 4

.12-43

Table 12.7

. 4 Other Covered Products For Which Residential Clothes Washer

Manufacturer Market Share Data Is Unavailable.

Manufacturer Other Products Manufactured

Alliance Commercial clothes washers, residential clothes dryers

Asko Commercial clothes washers, residential clothes dryers, dishwashers

Bosch

- Siemens Cooking products, residential clothes dryers, residential water heaters, dishwashers

Equator Residential refrigerators and freezers, residential clothes dryers, dishwashers

Fagor Cooking products, residential refrigerators and freezers, residential clothes dryers,

dishwashers

Fisher & Paykel Cooking products, residential clothes dryers, dishwashers

Haier Cooking products, residential clothes dryers, room air conditioners

Indesit Cooking products, residential refrigerators and freezers, residential clothes dryers,

dishwashers

Miele Cooking products, residential refrigerators and freezers, residential clothes dryers,

dishwashers

Samsung Cooking products, residential clothes dryers, room air conditioners

Staber Residential clothes dryers

Summit Residential refrigerators and freezers, residential clothes dryers, commercial refrigeration equipment, dishwashers

12.7.3.2 Other Federal Regulations

Potential Climate Change and Greenhouse Gas Legislation

Many manufacturers expressed concern about potential climate change legislation. O ne proposed regulation that would exacerbate the manufacturer burden caused by more stringent energy conservation standards on refrigeration products is H.R. 2454, the American Clean Energy and Security Act of 2009. This legislation would initiate a phase

- dow n of hydrofluorocarbons (HFCs) and would make the amended energy conservation standard levels considered in this rulemaking more difficult to achieve . Manufacturers were particularly concerned that these regulations could impact U.S. heat pump clothes wash er designs in the

future.

12.7.3.3 UL Conversion Costs

In the clothes dryer rulemaking, DOE account ed for the conversion costs for manufacturers to comply with the revisions to UL 2158 as mentioned in the comments from interested parties

. DOE notes that the UL 2157 and 2158 are not Federal regulation s. In contrast to the RoHS Directive requirements discussed previously, UL certification is a de facto requirement for selling products in the United States because many local building codes requir e all installed pro ducts to meet safety regulations. DOE has included the UL certification costs for both UL 2157 and UL 2158 as a sensitivity scenario in the GRIM, but does not include the UL

conversion costs in the main MIA results.12-44

For this analysis, DOE scaled the UL c onversion costs from the clothes dryer rulemaking by the relative number of shipments for residential clothes washers to arrive at a UL conversion cost for this rulemaking.

12.7.3.4 Other Regulations That Could Impact Residential Clothes Washer

Manufacturers

While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, in this section DOE has described a number of other regulations below that could also impact the residential clothes washers covered by this rulemaking

State Energy Conservation Standards
Manufacturers indicated that California has several programs that are either already in place or are currently in development that affect manufacturers of residential clothes washers

. Various building, electrical, mech anical, and plumbing codes in California affect clothes washers, and products are also subject to California’s laws on the Restriction on the use of certain Hazardous Substances (RoHS). California’s RoHS law took effect January 1, 2007 and

was modeled afte r the EU’s directive (described below), which bans certain hazardous substances from electrical and electronic equipment.

International Energy Conservation Standards

Residential clothes washer manufacturers that sell products outside of the United States are subject to several international energy conservation standards. In the EU, products are also subject to RoHS. This regulation bans the sale of new equipment in the EU that contains more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and PBDE flame retardants. Waste Electrical and Electronic Equipment (WEEE) and the Registration, Evaluation, Authorization, and restriction of Chemicals (REACH) are additional regulations that create compliance costs for man ufacturers that compete in Europe. REACH deals with chemicals and their safe use and has provisions that will be phased

- in over eleven years, beginning June 1, 2007. The EU also sets limits for the amount of energy consumed by equipment when it is in stand by mode and off mode. Additionally, HFCs are banned in refrigerants in several countries, such as Austria, Denmark, and Switzerland. Canada and several other foreign countries have regulations or have initiated regulations affecting clothes washer

manufact urers.

12.8 CONCLUSION

The following sections summarize the different impacts for the scenarios DOE believes are most likely to capture the range of impacts on residential clothes washer manufacturers at
each TSL in the standards case . While these scenarios bo und the range of the most plausible12-45

impacts on manufacturers, some circumstances could cause manufacturers to experience impacts outside this range.

12.8.1 Residential Clothes Washers

At TSL 1, DOE estimates impacts on INPV to range

- $5 6

. 3 million to

- $6 4

. 0 mill ion, or a change in INPV of

- 2. 2 percent to

- 2. 5 percent

. At this level, industry free cash flow is estimated to decrease by approximately 20 .2 percent to $1 70

. 0 million, compared to the base

- case value of $2 13

. 1 million in the year leading up to the amend ed energy conservation standards.

Because the top

- loading and front

- loading standard clothes washers comprise over 98 percent of the total residential clothes washer shipments, the vast majority of the INPV impacts

come from the standard

- size product classes. At TSL 1, most impacts on both INPV and free cash flow stem from the modest changes required for top

- loading standard clothes washers

because all of the front

- loading standard residential clothes washer s on the market today already

meet standards at this level. For top

- loading clothes washers, of which only 13 percent of the market currently meets standards proposed at TSL 1, the impacts on INPV and free cash flow arise from increases in upfront investment for product development and, to a lesser e xtent, the

per

- unit component costs required to achieve this efficiency level. TSL 1 would require investments in product redesign and improvements to facilities totaling approximately $10 3 .9

million in an industry with base

- case annual revenues of more th an $4.4 billion in the year the standards go into effect

.

Regarding increases in component costs, t he design options used to meet standards at TSL 1 include component changes such as electronic controls, agitator modification, and basket

modifications. F or top

- loading standard residential clothes washers

, these changes contribute only $8.44 (3.4 percent) to arrive at a MPC of $256.09. In summation, the cumulative effect on INPV and free cash flow is minimal largely because all front

- loading standard prod ucts and

some top

- loading standard products already meet the efficiencies required at TSL 1, and the design changes for the top

- loading standard products that do not meet the efficiency required at TSL1 would impose minimal costs. Further, as the efficienc ies required at TSL 1 are well below ENERGY STAR levels, manufacturers are likely to retain the premiums they currently see across the full range of product efficiencies.

At TSL 2, DOE estimates impacts on INPV to range

- $1 4.3 million to

- $4 90

. 3 million, or a change in INPV of

- 0. 6 percent to

- 1 9.0 percent. At this level, industry free cash flow is estimated to decrease by approximately 28. 4 percent to $1 52

. 6 million, compared to the base

case value of $2 13

. 1 million in the year leading up to the amended energy conservation

standards.

Because the top

- loading and front

- loading standard clothes washers comprise over 98 percent of the total residential clothes washer shipments, the vast majority of the INPV impacts

come from the standard

- size product classe s. At TSL 2, the impacts on INPV and free cash flow result from higher per

- unit costs for both top

- loading and front

- loading standard

- sized product12-46

classes as well as increases in product and capital conversion costs for both of these product

classes. The design options used to meet standards at TSL 2 for standard

- size products include

additional component changes to enable higher spin speeds and better control beyond the improvements to electronic controls and the agitator and basket associated with TSL 1

. The resulting MPC for top

- loading standard residential clothes washers is approximately $261.88 at
TSL 2, a $14.23 (5.7 percent) increase over current baseline units and similar to the incremental

costs at TSL 1. F or front

- loading standard residential clo thes washers , the MPC is approximately $524.33

, a $6.20 (1.2 percent) increase from the baseline . The product redesign and incorporation of these changes into manufacturing lines requires approximately $14 9

. 3 million in

total conversion costs

— a $45. 4 million increase from TSL 1.

TSL 2 brings all front

- loading standard clothes washers up to current ENERGY STAR standard levels. The most severe impact to INPV at TSL 2 is the result of margin compression on

front

- loading standard clothes washers as man ufacturers forfeit premiums and cut into margins as they try to maintain a marginally compliant competitively priced entry level product. While only a small fraction of front

- loading clothes washers (4 percent of shipments) would be impacted in the standar ds case at TSL2, in the tiered markup scenario with margin compression the profitability impacts on front

- loading clothes washers has a disproportionately large negative impact on INPV because most of the market is ENERGY STAR compliant in the base case.

At TSL 3, DOE estimates impacts on INPV to range $ 9 6.4 million to

- $8 58

. 8 million, or a change in INPV of 3.7 percent to

- 33.2 percent. At this level, industry free cash flow is estimated to decrease by approximately 3. 6 percent to $20 5

. 5 million, compar ed to the base

- case value of $2 13

. 1 million in the year leading up to the first tier of amended energy conservation

standards in 2015

.

At TSL3, the largest impacts to free cash flow and INPV stem from the substantial upfront investments required to achie ve this efficiency level. While the efficiency requirements for top

- loading standard clothes washers in 2015 require incremental changes to existing products, the 2018 efficiency requirements for top

- loading standard clothes washers are more

substantial. B ecause only 9 percent of current shipments of top

- loading standard clothes washers meet the 2018 efficiency standards established at TSL 3, m anufacturing products to meet the

2018 standards would require large investments in product redesign and conversion of facilities. Substantial investments would also be required for manufacturers to meet the 2015 front

- loading

standard. The total conversion cost required to meet the 2015 and 2018 standards at TSL 3 is approximately $4 18.5 million

— a substantial fractio n of overall industry value a nd $2 69

. 2

million higher than at TSL 2

.

Less than 25 percent of the conversion costs associated with TSL 3 can be attributed to the 2015 compliance for top

- loading standard products. This is a considerably smaller factor th an at TSL 1 and TSL 2 at which 97 percent 81 percent of conversion costs can be attributed to standard top

- loading compliance, respectively. The design options used to meet the 2015 front

loading and 2018 top

- loading standards at TSL 3 include larger unit capacit ies , damping systems, and reinforced structur al elements . Substantial changes to existing production facilities12-47

would be required to manufacture products to incorporate the 2015 front

- loading and 2018 top

loading design options

. Several manufacturer s have already introduced products that meet the

2015 front

- loading standard and 2018 top

- loading standard efficiency levels

, which mitigate s the required changes to production facilities for these manufacturers

. The two

- tiered compliance date of TSL 3 also mitigates the effect of the large conversion costs required to meet the 2018 top

loading standards, subjecting the impact on cash flows to greater discounting while also allowing manufactures to delay or spread out their conversion costs.

At TSL 3, t he MPC for top

- loading standard residential clothes washers is $256.09 to meet the 2015 energy conservation standard and $272.93 to meet the 2018 energy conservation

standard. F or front

- loading standard residential clothes washers the MPC is ap proximately $535.38 to meet the 2015 energy conservation standard

. For the 2015 standard this is an $8.44 (3.4 percent) increase for top

- loading standard clothes washers and a $17.25 (3.3 percent)

increase for front

- loading standard residential clothes was hers . For the 2018 energy conservation standard for top

- loading standard clothes washers, t his is a $25.28 (10.2 percent) increase. In the scenario in which manufacturers see no commoditization of higher efficiency clothes washers,

the modest increases to MPC translate to higher margins sufficient to offset the initial capital investments and product design costs over the 30 year analysis period. In contrast in the tiered mark up scenario, because TSL 3 sets standards for top

- loading standard clothes washer s at
current ENERGY STAR levels and standards for front

- loading standard clothes washers above these levels, manufacturers lose their premium markup for high efficiency standard

- size product classes leading to a substantial reduction in future revenues and subsequently in INPV.

At TSL 4, DOE estimates impacts on INPV to range $ 205.0 million to

- $1,2 56

. 4 million, or a change in INPV of 7

. 9 percent to

- 48. 6 percent. At this level, industry free cash flow is estimated to decrease by approximately 130.7 perc ent to

- $ 65.5 million, compared to the base

case value of $2 13

. 1 million in the year leading up to the amended energy conservation

standards.

Much like TSL 3, the impacts to INPV at TSL 4 result primarily from the substantial upfront investments require d to achieve the amended efficiency levels for standard

- size products, the incremental increases in per

- unit costs, and the potential margin impacts. In contrast to TSL 3, TSL 4 has no tiered compliance dates for increased energy efficiency standards for t op loading clothes washers. As such, manufacturers are required to cover the conversion costs for all products by 2015. Manufacturing products to meet standards for both standard

- size product

classes at TSL 4 may require a complete platform overhaul, resu lting in significant investments

in both product redesign and the conversion of facilities. The total conversion cost required to meet standards at TSL 4 is approximately $6 91

. 8 million

— a $ 273.3 million increase from TSL

3. The design options used to meet standards at TSL 4 include changes such as larger capacity, accelerometers, and better control technology beyond what is required for TSL 3

. The resulting MPC for top

- loading standard residential clothes washers at TSL 4 is approximately $308.30, and appro ximately $572.01 for front

- loading standard residential clothes washers. This is a $60.65 (24.5 percent) and a $53.88 (10.4 percent) increase from the baseline for top and front

-12-48

loading standard residential clothes washers, respectively. This increase in M PC translates to a 3.5 percent decrease in 2015 shipments

.

The impact on INPV arising from a decrease in shipments from price elasticity is minor in comparison to that stemming from product commoditization and margin impacts as analyzed

in the tiered ma rkup scenario with margin impacts for standard

- sized product classes. As TSL 4 brings standards for both front

- loading and top

- loading standard products above current ENERGY STAR levels, the fraction of products that are eligible for any additional markup above the baseline is further reduced as manufacturers sacrifice margins as they continue to seek

to maintain a low

- price

- point basic product offering.

At TSL 5, DOE estimates impacts on INPV to range $2 55

. 5 million to

- $1, 335

. 3 million, or a change in INPV of 9

. 9 percent to

- 51

. 6 percent. At this level, industry free cash flow is estimated to decrease by approximately 134.9 percent to

- $7 4

. 3 million, compared to the base

case value of $2 13

. 1 million in the year leading up to the amended energy conservat ion

standards.

TSL 5 represents the max

- tech efficiency level for both top and front

- loading standard

clothes washers. The effects on INPV result from similar sources as TSL 4, including the substantial upfront investments required to achieve the amended efficiency levels, the incremental increases in per

- unit costs, and the potential margin impacts. These effects, however, are compounded by the higher upfront investments for facility improvements and product development, the additional increases to the M PC, and the collapse of manufacturer margins as analyzed in the tiered markup scenario with margin impacts. At present, the market share of commercially available residential clothes washers that conform to this standard is negligible. As such, standards w ill affect nearly all platforms and manufacturers will incur substantial conversion costs associated with total redesigns and improvements to all production facilities. The total conversion cost required to meet standards at TSL 5 is approximately $ 713

. 7 m illion

—

a $ 21.9 million increase from TSL 4. TSL 5 does not delay compliance for the more stringent standard either top

- loading product class, so manufacturers will incur all product and capital conversion costs by 2015, leading to a larger negative impact on INPV.

The MPC for top

- loading standard residential clothes washers is approximately $317.44 at TSL 5, and approximately $591.64 for front

- loading standard residential clothes washers. This is a $69.79 (28.2 percent) and a $73.51 (14.2 percent) increa se from the baseline for top and

front

- loading standard residential clothes washers, respectively . However, the increase in per

unit production costs at TSL 5 relative to those at TSL 4 is comparatively small and involves only minimal incremental design op tions such as changes to load size sensors and more precise dispensing of laundry detergent and additives

. With the increase in MPCs, 2015 shipments are forecast to decrease by approximately 4.4 percent at TSL 5. However, the impact on INPV arising from a decrease in shipments from price elasticity is minor in comparison to that stemming from product commoditization and margin impacts as analyzed in the tiered markup scenario with margin impacts. Where TSL 4 still provided some room for markups above the most basic units, TSL 5 sets the standard for all products as high as technically feasible, leaving12-49

manufacturers no ability to differentiate products by efficiency. Thus, all margins collapse to

their lowest levels.12-50

REFERENCES

1 Association of Home Appliance Manufacturers. Current Members. Last Accessed December 2, 2009. < http://www.aham.org/ht/d/Organizations/divisions/Y/pid/2344 >.

2 Consortium of Energy Efficiency Clothes Washer Qualifying Products List.

< http://www.cee1.org/resid/seha/rwsh/rwsh

- main.php3 >

3 California Energy Commission. Appliance Efficiency Database.

< http://www.appliances.energy.ca.gov/QuickSearch.aspx >

4 ENERGY STA R. Qualified Clothes Washers

. < http://www.energystar.gov/index.cfm?fuseaction=find_a_product.showProductGroup&pgw_

code=CW >.

5 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Companies , 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.